"Within the week, it didn't plunge further from our preliminary reading but it is below 50. The broad story is that China is decelerating. It's not a collapse but we need to see policy measures to support growth after Chinese New Year otherwise we might continue to slide, " said Frederic Neumann, co-head of Asian economics and managing director at HSBC.

Meanwhile, a sell-off on Wall Street overnight also weighed on sentiment. The Dow Jones Industrial Average, S&P 500 and Nasdaq shed over 1 percent each after the Fed opted to stick with its plan to trim its monthly bond purchases, now down to $65 billion, regardless of recent distress in emerging markets.

After HSBC's final PMI reading fell to a new six-month low, the bank's MD & Co-Head of Asian Economics Research, Frederic Neumann, describes the extend of China's deceleration.

Japan's benchmark index managed to close above 15,000 points after hitting a two-and-a-half month low earlier in the session. Investors took their cues from a stronger currency as the yen rose to 102 per dollar on rising safe-haven demand.

Traders also reacted to news that December retail sales rose an annual 2.6 percent in December, up for a fifth straight month but that still missed Reuters estimates and was below November's 4.1 percent increase.

Among the top losers, Nintendofell over 4 percent after announcing a $1.2 billion stock buyback while Sumitomo Mitsui Financial slumped over 5 percent despite after reporting a 28 percent gain in net profit in the nine months to December.

Sydney drops 0.8%

Australia's benchmark S&P ASX 200 moved closer to Monday's one-and-a-half month lows while the Australian dollar fell below 88 U.S. cents to a three-day low.

Indian shares tumbled over 0.7 percent while the rupee fell 0.4 percent against the dollar.

In Indonesia, the Jakarta Composite finished flat and the rupiah hovered near Monday's two-week low. But Malaysian shares bucked the trend to gain 0.8 percent while the ringgit traded within sight of a new four-year low.

Mainland shares fell as investors booked profits ahead of the Lunar New Year holidays. The Shanghai Composite will be closed from Friday and will only resume trade late next week.

Sentiment was also hurt after the People's Bank of China skipped open market operations following Tuesday's $12.4 billion cash injection; that saw the benchmark 7-day repo rate trade at 5 percent, higher than 2013's average of 4.1 percent.

Among financials, Merchants Bank and Shanghai Pudong lost over 1 percent each.